Rumors Of The Demise Of OPEC’s Production Cuts Greatly Exaggerated
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From left to right; UAE Energy Minister Suhail al-Mazrouei, India’s Minister of Petroleum and … [+] Natural Gas & Housing Shri Hardeep Puri, Minister of Petroleum and Mineral Resources Tarek EI Molla and the U.S. Envoy for Energy Affairs Amos Hochstein leave the podium after the opening ceremony of the Abu Dhabi International Petroleum Exhibition & Conference in Abu Dhabi, United Arab Emirates, Monday, Oct. 31, 2022. Saudi Arabia and the United Arab Emirates defended on Monday a decision by OPEC and its allies to cut oil production, even as an American envoy warned of “economic uncertainty” ahead for the world. (AP Photo/Kamran Jebreili)
Copyright 2022 The Associated Press. All rights reserved.
Oil prices bounced back Tuesday as members of the Organization of the Petroleum Exporting Countries (OPEC) and their allies disputed media reports that they are considering reversing their October decision to cut output.
International benchmark Brent was under $90 a barrel on lingering concerns about the poor state of the global economy and weak demand for petroleum heading into 2023.
Saudi Arabia, the United Arab Emirates, and Iraq all denied report in the Wall Street Journal that the oil cartel was considering increasing output by 500,000 barrels a day at its next meeting on December 4.
An OPEC increase would signal an easing of the 2 million barrels-a-day reduction the Saudi-led group announced in October. That move infuriated the Biden White House at the time. And any easing could be seen as a positive move for relations between the producer group, led by Saudi Arabia, and the Biden administration.
However, Saudi Energy Minister Prince Abdulaziz bin Salman denied the report and said the cartel’s 2 million production cut would remain in effect through next year. Rather than an olive branch to the White House, the report was more likely a trial balloon from OPEC to test how the market would react to higher oil output in December. If so, OPEC found a soft market with little stomach for more oil.
With a recession looming, a deteriorating economic outlook, and a softening forecast for global oil demand, there’s just not the appetite for oil to justify OPEC easing cuts.
The demand isn’t there. More oil would mean lower prices, and the members of OPEC want the profits that come from higher prices.
In fact, the cartel’s decision in October to cut output now looks justified and even prescient, as major forecasters like the International Energy Agency (IEA) have slashed their demand forecasts in recent weeks.
The IEA last week lowered its global oil demand growth estimate for next year to 1.6 million barrels a day, citing mounting economic concerns and Europe’s energy crisis. That’s down from 1.7 million barrels a day.
The dilemma for OPEC and its allies, including Russia, is that there are legitimate supply concerns in the near term that must be factored into their attempts to manage the market price in the context of weakening demand.
The EU is set to announce their price cap on Russian oil exports tomorrow that will further reduce the amount of oil available on the market. The cap bars shipping companies and insurers from transporting Russian oil unless it is sold below the agreed price cap.
Russia is a central member of the OPEC-plus alliance, a fact that complicates decision making within the coalition. Moscow will be hesitant to give up market share to other members of the cartel.
Oil prices will likely remain volatile over the next couple of weeks against this backdrop of uncertainty, with the EU embargo and potential price cap scheduled to start the day after OPEC’s December meeting. If the cap agreement goes to the wire, OPEC may delay its meeting to avoid further clouding the market.
There is also China and the strengthening U.S. dollar to consider.
The pandemic is not over, as rising caseloads in China and three recent Covid-related deaths in that country attest. In Beijing, health officials say the situation is “its most complex and severe” since the pandemic began. Beijing’s “zero-Covid policy” is not going away anytime soon.
Traders are fleeing to safe-haven assets such as the U.S. dollar to minimize their exposure to risk in financial markets. A stronger dollar tends to weigh on demand as it renders crude oil, which is priced in dollars, more expensive for importers.
Adding to the challenges caused by the strengthening dollar is the general sense that interest rates have not yet peaked as the Federal Reserve tries to tamp down inflation.
Oil will have trouble finding a price floor in this environment. That won’t change until demand returns.
Until we get some positive news from either China or the U.S. economy, the dollar will continue to rebound while oil prices sink. OPEC, with its denials of a supply increase, may have set a floor of $85 a barrel under the Bent international benchmark, particularly given the ongoing supply risks posed by Russia.